Shell Takes $22 Billion Write-Down, Expecting Lower Oil and Gas Prices

Source: By Sarah McFarlane, Wall Street Journal • Posted: Tuesday, June 30, 2020

The Anglo-Dutch energy giant’s action follows a similarly large write-down by BP

Lower oil and gas prices brought on by the pandemic have caused major oil companies to question the value of their reserves. Photo: nacho doce/Reuters

LONDON—Royal Dutch Shell PLC is writing down the value of its assets by up to $22 billion because of lower energy prices caused by the demand-sapping coronavirus pandemic.

The write-down follows one by BP PLC on a similar scale earlier this month. Lower oil and gas prices brought on by the pandemic and uncertainty over the pace of the transition to lower carbon energy have caused major oil companies to question the value of their reserves.

The broad reassessment of asset values by two of the energy sector’s largest companies is about more than a response to the pandemic and its impact on oil and gas prices, said Luke Parker, vice president, corporate analysis at consulting firm Wood Mackenzie. The actions signal that large amounts of oil and gas are likely to be left in the ground.

“It’s about fundamental change hitting the entire oil-and-gas sector,” Mr. Parker said. “Within this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”

Shell’s largest write-downs come from its gas business, where it faces a charge of up to $9 billion, including reductions to the value of the Prelude and Queensland Curtis liquefied natural gas projects in Australia.

The energy industry’s earnings are under pressure and some companies are having to borrow to pay dividends. In April, Shell cut its dividend for the first time since World War II, upending investors’ expectations that major oil companies would provide reliable dividends.

Shell said Tuesday that its gearing level—net debt as a percentage of total capital—is expected to rise by up to 3% because of lower asset values. In April, Shell’s gearing was 29%, above the company’s target of 25%.

“Following the dividend cut, we think Shell, even in the current environment, will deleverage quickly, and this should open the door for greater distributions to shareholders,” said Biraj Borkhataria, co-head of European energy research at RBC Capital Markets.

Shell expects benchmark Brent oil prices to average $35 a barrel this year and $60 a barrel in the long term.

Shell’s shares traded down 2.2 % on Tuesday.

|